Grupo de Economia da Energia

A future agenda for biofuels policy in Brazil

In biofuels on 17/01/2011 at 00:30

By Renato Queiroz

The Brazilian Association for the Study of Energy – AB3E – held on December 14, 2010, in Rio de Janeiro, a seminar to discuss the agenda for the Brazilian energy policy for the next administration. In the specific panel, where agenda for biofuels was discussed, there were two approaches: one from representative of Petrobras, Eduardo Correia, Competitive Strategy area, who identified a number of critical uncertainties that influence strongly the biofuels market, developing initially from these uncertainties four exploratory scenarios and selecting two scenarios for the next 20 years, and the other one from professor José Vitor Bomtempo, Energy Economics Group, who assessed the future of the biofuels industry in a strategic approach with assumptions that break current paradigms.

This article presents the considerations from these experts and question on the topic that will surely be discussed by energy policy agenda developers for future years.

Critical uncertainties affecting the biofuels market. The Petrobras’ view.

According to the Petrobras executive, Brazil has a vast experience in the biofuels field, since ethanol has been used as fuel in Brazil for almost a century. The country still holding the largest portion of biofuels in the composition of demand for road transport. These facts are relevant to a strategic assessment of the future related to this industry. Petrobras, in its energy planning, used the technique of scenarios, listing a number of critical uncertainties that are interconnected, as follows:

  • Economic growth that affects the fleet size and demand for fuels.
  • Exchange rate that is strongly related to competitiveness with fossil fuels in the domestic market and biofuels in international market.
  • Oil prices that influence the prices of fossil fuels to the consumer.
  • Opening the international market that faces protectionism and trade liberalization.
  • Taxation incurring in final prices to consumers.
  • Social and environmental sustainability that relates to job creation, product life cycle, costs, terms.
  • Production costs and logistics costs that have strong relationship with technology and use of resources and services to domestic and foreign markets.
  • Competition for resources: soil, water, inputs
  • Technologies in the production of biofuels, carbon capture and storage – CCS and promoting energy efficiency.

With this picture four Scenarios for 2030 were prepared, and two of them were selected: Sustainable Development and Force of Habit.

In the first one, “Sustainable Development”, the following major points that will guide the scenario were highlighted:

  1. Cooperation between State and market, seeking economic growth based on sustainable practices.
  2. There will be international and local pressures for sustainability.
  3. There will be less restrictive fiscal policies, focusing on employment generation.
  4. Productive activity will be more diversified, seeking for greater production and energy efficiency.
  5. Energy, economic and climate policies will be integrated.
  6. Development of clean and sustainable technologies will be emphasized.
  7. There will be higher taxes on fossil energy, particularly on oil byproducts.
  8. There will be incentives for biofuels produced from a sustainable basis.
  9. Biofuels with portion about 18% of the national energy matrix in 2009 will have about 35% in 2030.
  10. The portion of flex-fuel vehicles in the destination of Brazilian ethanol that was 52% in 2009, will reach 77% in 2030, in this scenario.

In the scenario called “Force of Habit” we highlighted the following characteristics:

  1. The State has a regulatory role in and will act promptly in the economy due to market pressures.
  2. There will be maintenance or worsening of income distribution subject to economic cycles.
  3. The export will be primarily focused on commodities.
  4. The pressures against the use of fossils in the matrix will exist but they will not cause mobilization and environmental benefits.
  5. The technological development will be focused on cost reduction and competitiveness.
  6. The moderate growth in oil prices and an appreciated exchange rate favors the maintenance of competitiveness of oil byproducts.
  7. Maintenance of the current tax structure.
  8. Biofuels with portion about 18% of the national energy matrix in 2009 will have about 28% in 2030.
  9. The portion of flex-fuel vehicles in the destination of Brazilian ethanol that was 52% in 2009, will reach 68% in 2030.

Finally relevant points that should support the preparation of energy policies were presented:

  • The biofuels market in Brazil is predominantly governed by the market laws, unlike the rest of the world, where the dynamics is provided by public policies.
  • The logistics issue is a barrier to the flow of final products (ethanol and biodiesel).
  • Scarce resources are critical in the global context, but not in Brazil, where the first-generation biofuels prevails.
  • Strong tax asymmetry favors ethanol and CNG in the fuel matrix.
  • Flexibility in the use of fuel generates more volatility in prices and demand.
  • The Brazilian view focuses on strengthening the competitive advantages related to the first-generation, paying little attention to second-generation biofuels.
  • Priority should be given to energy efficiency, public transport and P&D related to second-generation.

Has Brazil preparing itself for a biomass-based industry of the future?

The expert José Vitor Bomtempo, Energy Economics Group/UFRJ, however, evaluates that the strategic energy planning supported by a sustainable development should prepare its scenarios with ambitious assumptions and not based on paradigms. He assumes that biofuels industry of the future has nothing to do with ethanol, biodiesel, etc. We should think about Post-ethanol era. The important thing is sugarcane, not ethanol. This industry would be integrated biomass, and one of the products will be biofuel.  By analyzing more than 50 P&D projects he states that talking about second-generation is not a good terminology.  It is directed to various combinations of new commodities, new technologies, new products, new businesses. Professor Bomtempo also identifies in this research the possibility of diversity of technologies with advances in genetic engineering and thermochemical routes. That is, the combined technologies that indicate the construction of new industries and new products.

He advises that ethanol may not have long useful life.  And this fact is important for long-term energy strategic planning. Another point emphasized is that the nature of competition will tend to be different from what we know today in the first-generation. Nowadays if the entrepreneur has the raw material (palm, soybean, etc.) the machinery is ordered from an engineering company, for example. So the investor furnishes plant and positions himself/herself as a large producer of biofuel. This situation is what we call « industry ruled by supplier » : technology comes from external suppliers.

The industry of the future will be more advanced in terms of technology. We are talking about new technologies that can not be purchased from engineering companies and suppliers in general. The new industry will be something about we call “science-based industry.” This is a fundamental change to gain access to technology and competition.

It appears that foreign companies are entering this industry of the future. SHELL is an example with four companies with different technologies. They are independent companies, investing and learning from different technologies. Certainly not all technologies shall prosper. The strategy is different from that employed by Petrobras, for example, which is a single company and has a Research Center (CENPES) whose productive investments are focused on first-generation ethanol and biodiesel.

And then, the question is:  Has Brazil preparing itself for this “new industry”?

Considerations on the future Brazilian agenda for biofuels under a strategic nature.

In the debate held in Rio de Janeiro, attended by energy economics experts, we observed that there are some analyzes and understandings of consensus on the future of biofuels in Brazil. The Petrobras expert, for example, identified strengths and weaknesses arising from internal characteristics to the biofuel sector in the country, compared to the fossil fuel industry and biofuel producers abroad namely:

Competitive forces: i) The first-generation technological expertise, ii) high agricultural and industrial productivity, iii) cogeneration and reuse of waste, iv) wide availability of natural resources (land and water) and appropriate weather. Weaknesses: i) High logistical costs, ii) strong dependence of the prices of agricultural inputs and co-products (soybean, sugar, etc.), iii) delay in second-generation P&D Research and Development, iv) view of the industry focused on short-term (investment decisions, technological paradigm etc.), v) low-concentrated market structure and low scale and low integration.

There are questions, however, that require strategic planning analysis. Although Brazil has, at the moment, a privileged situation of availability of large amounts of energy resources, this condition requires a strategic planning for options. The scenario that emerges is very different from experiences that planning experienced in the past, when the choices were limited. The planner now faces a range of options available to meet the energy demands in the various economic sectors.

The energy sector is undoubtedly one of the most important for the economic and social development in the future.  But we should ponder that the speed and priority of oil production in the Pre-salt layer, should consider the opportunities for productive sectors, such as biofuels. This fact is of great strategic importance and should guide the energy public policies.

We have to list some information so the reader can understand how the strategies of the “green” energy industry are placed in the global energy game.

The International Energy Agency – IEA – through 2010 World Energy Outlook, in one of its scenarios “New Policies” presents as basic premise plans disseminated and made by several countries to reduce emissions of greenhouse gases by 2020. That is, energy programs developed by governments are understood by international bodies, such as commitments to energy use with the preservation of natural resources and environment.

We have to mention also the actions between developed countries for spreading low-emission technologies. There is an intensification of strategic dialogues between the European Union – EU and the United States – USA on this subject. Note, for example, the establishment of the Energy EU-USA Council. The European Parliament in its Proposal for Resolution issued on September 9, 2010 exalts that this Council will provide “a new framework for deepening the transatlantic dialogue on strategic issues on the energy sector, namely security of supply, policies aiming at changing to energy sources with low carbon emissions, and the strengthening of ongoing scientific collaboration in energy technology.” (emphasis added)

Another highlight is the decision made by G-20 [1] in late 2009 on the streamlining and reduction of subsidies to fossil fuel consumption, encouraging investments in fuels that contribute to reducing CO2 emissions.

What I want to clarify is that the “interests” is to make possible effective management for sustainable development, with rational use of raw materials, and energy, to introduce new business opportunities commanded by large international corporations, will reflect in discussions at global geopolitical level.

Brazil trying to become an international energy player should develop its energy agenda, believing that the current corporate paradigm is aimed at greater continuity for enterprises through business models that fit under a proposed sustainability for Earth. The international pressure is growing for the implementation of actions committed in this direction.

Another approach is to create jobs. The low-carbon technology industry will certainly bring significant results for the economic and social development, production and consumption standards and hence the creation of new jobs. The 2009 report prepared by International Labour Organization (ILO), in partnership with the United Nations, concerning the future of jobs aimed at environmentally innovative technologies, makes a prediction that by 2030 20 million new jobs will created, and 12 million in bioenergy industries.

And in this context it is essential an evaluation under strategic nature for long-term energy planning in order to guide the future agenda of biofuels.

The questions presented by Professor José V. Bomtempo at AB3E seminar on the biofuels industry are within this strategic context. Innovation should be the focus of strategies for an industry that will meet the new paradigm of sustainability business. The development of research focused on the industries of the future, the creation of incentive mechanisms for increasing the number of scientists in the country are strategic questions. The 2010 UNESCO Science report shows the status of science in the world, published every five years, points out that Brazil increased its investment in research between 2002 and 2008 by almost 30%. But according to Hugo Hollanders, a Dutch expert and one of those responsible for the UNESCO report, the Asian situation, however, is better than the Brazilian one. He points out that “in the past five years, many American and European leading academics have received invitations to work and significant research budgets in universities in East Asia. This can be a Brazilian strategy. After all, the developed world in crisis and Brazil growing creates a situation that favors the exchange of Brazilian and foreign experts. [2]

And in this context we have some items to the composition of this agenda in relation to the establishment of public policies for science and technology and directed to biofuels industry. These proposals, in my view, would have to be discussed and already begun by the new government, in order to obtain results at the medium and long term.

  • Increase in the process for qualifying researchers seeking a greater knowledge base, in Brazil, for new feedstocks, new processes and products for biofuels industry of the future.
  • Increased exchange of Brazilian and foreign scientists to give Brazil a greater number of specialized human capital in the biofuels industry of the future.
  • Strengthening and prioritization of investments in P&D and National Innovation Programs under a synergistic process of a strategic plan for biofuels.
  • Development of strategic partnerships between national and foreign companies for the implementation of pilot projects for biofuels and bioproducts industries of the future.

On first-generation biofuels issues, Eduardo/Petrobras presented at AB3E seminar, within the scenarios developed by Petrobras, issues that must be faced following the new administration; among them we highlight the high logistics costs, the strong dependence on the prices of agricultural inputs and co-products, such as soy and sugar. But here are some considerations about the National Program for Production and Use of Biodiesel – PNPB reaching six years from its establishment and regulation. After all, as pointed out by Prof. Bomtempo, “biodiesel has no leading producer and there is no defined industrial structure.” And we must remember that “dieselization” of the fleet in the global transportation is a reality that must still remain for some years, despite advances in new technologies. Finally, some thoughts on the biodiesel. The Lula’s administration presented a program aimed at achieving economic, energy, environmental and social results. Within the Earth’s goals of sustainability, the program, in fact, is progressing. Biodiesel has an important role in reducing CO2 emissions, the main greenhouse gas, for it is a renewable fuel derived from the processing of oils and animal fats and vegetables. Regarding the production, we can state that there are reasonable progresses, and Brazil has about 60 plants with a production capacity of about 5.0 billion liters per year, but with an idle capacity around 50%.

Regarding the social objectives aimed to produce the fuel from typical family farm, the expected success did not occur.  Family farmers have difficulties to obtain a higher productivity of their crops, not getting enough production to provide. In addition, the global economic crisis led several companies, including Brasil Ecodiesel, the largest biodiesel company, to face difficulties to operate their industries at full capacity.  This situation has affected farming families included in the biodiesel program because there were no compulsory purchases [3].

In the economic field there are good results in reducing the import of petroleum diesel. But we have to mention that current data from the National Energy Balance, EPE/MME, indicate that the transport sector consumed 48% of diesel, below 1990 portion that was 51%.  In the two scenarios presented by Petrobras portion of diesel in the transportation sector in 2030 will be even a little over 40%.

Biodiesel is also part of the agenda of the global “green business” matrix, which should draw attention to aspects of competitiveness, for example, in its production. Just to cite one example, Germany now has a set of public policy for incentives, one of the largest producers of biodiesel with a large consumer market. It has a large industrial park with processing plants located throughout the country, a well structured distribution system using a B5 blend, captive fleets, pump stations for exclusive sale of B100, etc. There are other examples, in Europe, like France  A large producer with goals in its biodiesel program, and seeks to decrease dependence on fossil fuels and particularly the development of new options for agriculture. That is, the “world” of the green energy business is moving forwards.

In Brazil, the production of biodiesel is dependent on soybean that contributes about 80%.  The secondary raw materials are beef tallow and other animal fats totaling about 15%.  However, the soybean oil, according to experts, has low income (in oil) if compared with other plants that have a higher potential and dominated technology, such as sunflower, peanut, cotton, canola.  There are other raw materials that still need technology, as some types of palm trees, which have higher potential of efficiency.

In this sense, the dependence of a “commodity” program, soybean, can create uncertainty regarding the supply of biodiesel [4]. The biodiesel production model based on soybean oil may have long-term prospects for expansion.

Accordingly, we have an extra item that might be on the future agenda of biofuels.

  • Establishment of a more aggressive P&D program with significant investments in other commodities, for the National Program for Production and Use of Biodiesel has an offer that meets the goals (B8, B20, B100) desired and can even participate actively in world trade.

Brazil, with a favorable climate and availability of land, is capable of being a competitive country in the development of biofuels industry of the future. In fact, there are agricultural and industrial achievements until now. However, as previous article [5], the context of the current era of transience creates uncertainty. Planning should consider innovation as a prerequisite. Thus, public policies based on a long-term strategic planning provide future generations to avoid the discontinuities of a technological process acquired. Finally, I also assure that Brazil can not fall into the trap of prioritizing only the production of oil in the Pre-salt, in its future energy agenda, without considering productive opportunities in strategic sectors such as biofuels.


[1] Twenty largest economies, accounting for about 85% of global GDP.

[2] According to the report, “China is about to overcome both the USA and EU in numbers of researchers.”

[3] We have to mention that the entry of Petrobras Biocombustível (PBio) in 2008 boosted the program, operating plants in several states allowing an improvement in the inclusion of family farming.

[4] PBio has been partnering for the development of production systems with continuous supply of raw materials and/or vegetable oils for biodiesel plants. Embrapa conducts research into this partnership with various plants, native palms, including local interest ones.

[5] See Infopetro Blog.“Energy planning in a era of transience

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